Weekly Wrap

Sounding like he really means it, President Barack Obama promised earlier this week to rein in spending by the federal government. His proposed three-year budget freeze, however, does not apply to military intervention overseas, to homeland security, to entitlements, nor to economic-stimulus-that-may-be-needed-from-time-to-time. That leaves only one-sixth of the budget to be "frozen." For everything else, the sky's the limit.

Déjà vu all over again, as Yogi would say. This freeze in "discretionary" spending is exactly what Obama's predecessor, George W. Bush, proposed two years ago when rolling out the nation's first $3 trillion budget. And how well did that work? Glad you asked. The FY2009 budget started ballooning before the ink was dry when Bush okayed the TARP bailout. With the banks taken care of, Obama allocated unspent TARP money to the auto industry. Then came the $787 billion stimulus package. When the fiscal year came mercifully to a close last September 30, federal spending for the year finished just shy of $4 trillion.

Trouble was, $1.8 trillion of that had to be borrowed. $383 billion of it was interest paid on money already borrowed. Obama's "freeze" will not stop the red ink. His FY2011 budget calls for spending $3.6 trillion, or 16% more than the last time a U.S. President used the word "freeze." Can you imagine what a thaw would look like? Congress already has. Yesterday the Senate voted to raise the nation's debt limit by $1.9 trillion to $14.3 trillion. Plus ça change. Now if only the French had a word for entrepreneur.

Add public and private debt together, and you get a number approaching $50 trillion, or almost four times GDP, a record in the U.S.:

courtesy Van Hoisington and Lacy Hunt

The graph illustrates that the debt-to-GDP ratio last saw a similar peak in midst of the Great Depression. It also suggests that much of peak debt needs to be extinguished before sustained economic growth can resume. As Van Hoisington and Dr. Lacy Hunt explain, "once debt becomes excessive, countries do not grow their way out of the problem; they must go through the time consuming and often painful processes of debt repayment and increased saving."

But growing our way out of the problem is exactly what the Obama Administration is trying to do--with fiscal stimulus and near-zero interest rates. The goal: creating more debt in an economy already swamped by debt. Over-exposed consumers are doing the right thing by paying down credit balances, but lenders are too slow to write off bad debt, some of which has simply been transferred to the Federal Reserve Bank's balance sheet through the creation of new fiat currency. American exceptionalists, take note. A recent book written by Carmen Reinhart and Kenneth Rogoff entitled This Time Is Different concludes, after abundant historical research, that no time is ever different: debt deflations are always painful and protracted.

Just in from the Commerce Department: GDP grew at an annual rate of 5.7% in the fourth quarter of 2009. Before jumping to the conclusion that we can grow out of this mess, look more closely. Most of the statistical increase was due to the restocking of depleted inventories; final sales were up a more modest 2.2%. Personal consumption was up just 1.4%. Hours worked in the private sector were down 0.5%. David Rosenberg of Gluskin Sheff calls it the Houdini recovery, destined to disappear once inventory builds and capital spending have run their course. Bottom line, today's headline GDP is a rear-view, drug-induced number unlikely to be repeated anytime in 2010.

Who's the mark? Revealed here.

Monday Muse

Dionne Warwick

You've Lost That Lovin' Feelin'

Weekly Wrap

We know he drives a truck--but what kind? Is it one of those monster-ma-deals seen at car shows, the ones that drive up and over a whole row of puny imports, crushing them in the process?

Whatever it is, the Wrentham Wrecker (owner: Scott Brown, Republican) has been leaving tread marks all over the political landscape. The first to be flattened was Martha Coakley, Massachusetts AG and Brown's opponent in the race for Ted Kennedy's U.S. Senate seat. In Tuesday's election, Brown won going away. Add to the road kill President Barack Obama's health reform bill, which succumbs to the new math in the Senate.

Want more victims? How about Treasury Secretary Tim Geithner? Check out where he is standing in the photo below, taken at a press conference yesterday:


Turbo Tim is at the far left, displaced in Obama's inner circle by former Fed Head Paul Volcker (the six-foot-seven legend looming large behind the President). Geithner has been coddling the big banks on Wall Street throughout the financial crisis, while Volcker has been urging the President to cut them down to size. Brown's victory has improved Obama's hearing, thus Thursday's rollout of the new Volcker Rule.

Geithner does not get a rule named after him. Instead, he gets to go stand in the corner. Look at the photo again. How bad is that when your boss uses MA Congressman Barney Frank as a physical buffer between you and him? O.K., O.K., maybe Obama was just trying to win back some favor with Bay Staters by showcasing their congressman. Still, Tim does not look happy. He has since leaked his displeasure with the bank bashing, which means that his days on the job may be numbered.

Another heavyweight in line for a pink slip is none other than the current Federal Reserve Chair, Ben Bernanke, who needs to be confirmed by the Senate before the end of next week to be assured of another term. Today Senators are falling over one another reaching for the microphone to announce to their constituents that they will not support Bernanke's nomination. Credit Brown for this rush to the exits, as well as for Obama's instant lame-duckery. (How's this for lame: Obama jumped on Brown's bandwagon, I mean truck, by claiming in a morning-after interview that he was the original Scott Brown in 2008, before Scott Brown even thought about being Scott Brown.) Amazing; Obama went from the hunter to the hunted in just one year.

Anyone get the plate number on that truck?

[update 01-28-10:]

The Senate votes on Bernanke's nomination...

Monday Muse

Joan Baez

Diamonds and Rust

Weekly Wrap

A "tell" for Election Year 2010? That is how pundits describe next Tuesday's special election in Massachusetts for the U.S. Senate seat formerly held by the late Ted Kennedy. In a normal year, a seasoned Democratic public servant like Martha Coakley (above) would coast to victory in the liberal Bay State. But recent polls are all over the place as to how close this race really is. Republicans are trumpeting that little-known state senator Scott Brown (below) has pulled into a dead heat. Can this be for real?


This race may be an early referendum on President Barack Obama's ambitious healthcare reform bill, still being worked out in Congress. The President had hoped to have the legislation passed by Christmas and now wants it no later than his State of the Union address (date still uncertain, possibly in early February). The real deadline may be January 28, the day before the Massachusetts Secretary of State certifies the results of the special election. If Brown wins, he becomes the 41st Republican Senator, the marginal vote that a unified Republican caucus needs to filibuster the healthcare bill. It's a race within the race.

Coakley probably wishes that Congress had met the original target date. That would have gotten her off the hook for a bill that most Americans oppose but which she supports. Brown has pounded her on this issue, which distracts voters from the good work that she has done as the state's attorney general. She investigated contractor abuses arising from Boston's infamous Big Dig and two years ago was busy chasing down miscreants on Wall Street for peddling toxic derivatives to citizens and cities alike (documented here and here). As well, she questions the surge in Afghanistan, a stance that should earn her brownie points in the only state won by anti-war candidate George McGovern in the 1972 Presidential election.

If Coakley loses, or even wins with less than a 50% majority, it will be because of her party affiliation--and her party's damn-the-torpedoes commitment to bigger government. As David Rosenberg of Gluskin Sheff offers in this morning's "Breakfast with Dave," the outcome in Massachusetts may betray "the general public's concern over the implications of running up a fiscal tab that could threaten the country's future prosperity to curb today's consumer deleveraging pain--a mini Tea Party of sorts, which is why the vote is being held in the right state."

Don't forget the banks. No way can I wrap the week without a quick look at the financial sector. Reporting this morning, JPMorgan Chase was the first of the big banks out with fourth-quarter earnings. The lipstick was good (profits quadrupled from the preceding quarter), but the underlying complexion was spotty. Revenues came in a bit light; and loan-loss provisions for two divisions, Retail Financial Services and Card Services, added up to $8.5 billion. Firmwide credit reserves now total $32.5 billion and, according to management, may expand further in 2010, meaning charge-offs for bad loans are far from over. "Consumer credit costs remain high and weak employment and home prices persist,” said CEO Jamie Dimon. “Accordingly, we remain cautious.”

How cautious? The company left its quarterly dividend at a nickel a share, where it has been for the past year (after getting axed from 38 cents last February). Investors are disappointed, knocking a buck off the share price in today's trading. And this is one of the strongest banks out there. What happens when ne'er-do-wells Citigroup and Bank of America, more highly leveraged to struggling consumers, report next week? The mind boggles. Maybe that's why the Dow is down triple digits today. Black Tuesday, anyone?

But Diamond Jamie has his. Even as the company was flipping nickels to shareholders, the average compensation for each JPMorgan employee jumped 20% in 2009. Doesn't that make you feel good all over?

Job-Less Recovery

The chart above has been widely shared by bloggers in the past week. It shows negligible job growth in the U.S. over the past decade. Jobs created by the debt boom of the first part of the decade have been repealed in just the last two years.

Next question: when are they coming back? Optimists are banking on a V-shaped recovery any day now. Typically job growth resumes within a month or two after the economy hits bottom, but research at Hussman Funds finds that the current recovery is hardly typical. If we assume that growth in GDP reported for the third quarter of 2009 marked a bottom at the end of June, then the current employment trend (illustrated by the red line below) is clearly lagging the average bounce (in blue):


In fact it more closely resembles the delayed recovery following the 2000-01 recession:


...all of which suggests that we might have another two years or more of flat to negative job growth.

Except for public-sector jobs. While private-sector nonfarm payrolls have declined by 6.625 million (-5.8%) since January 2007, total government jobs have increased by 355,000 (+1.6%). Taxes on the former (goose) pay for the latter (golden eggs), so one wonders how long that disparity can continue. Expect it to widen in 2010 as we go about the decennial task of counting ourselves.

Chris Wood at Casey Research summarizes: "the loss of employment has occurred entirely in the private sector, as Uncle Sam grows more bloated each day. If you happen to be in the private sector, it also might not psych you up too much to know that the average pay per federal worker in 2009 was reportedly $75,419, while per capita average annual income across the U.S. is only about $36,000."

Monday Muse

Sarah McLachlan

Blackbird

Weekly Wrap

1.4 million Americans filed for bankruptcy in 2009, one-third more than the year before, according to a report earlier this week in the Wall Street Journal. Recall that President George W. Bush tried to suppress bankruptcy filings by signing the Bankruptcy Reform Act of 2005. At first it was mission accomplished. Following a rush to the exits by filers hoping to beat the new law, bankruptcies dropped by three-fourths in 2006. As the chart above shows, they have been rising ever since.

Running for re-election in 2004, Bush championed the concept of the "ownership society," proclaiming that "America is a stronger country every single time a family moves into a home of their own." Of course, for most folks owning a home means taking out a mortgage. The Bush Administration, aide and abetted by Congress, facilitated widespread "ownership" by allowing exotic mortgages with no down payments, little or no payments for the first few years, and no documentation of a borrower's ability to repay. In truth, most of the owning going on during Bush's second term was banks (and upstream investors) coming to own uninformed borrowers.

With the Bankruptcy Reform Act, Bush and his acolytes in the banking industry wanted to make sure that borrowers would forever own up to their debt, not slough it off when times got tough. It should have been called the Debt Slave Act, says Mike Mish Shedlock, who considers it poetic justice that a bill designed to promote high-risk lending has backfired. Shedlock is not at all surprised by the uptick in bankruptcies, particularly Chapter 7 filings, which clear the deck by liquidating assets to pay off some debts and absolving filers of the rest. "If you're unemployed, struggling, and deep in debt, it may be best to get it over with." And do it now, before you're re-hired, while the means-testing for Chapter 7 works in your favor.

In cases where borrowers cannot simply walk away from their debt (as they do when, for example, defaulting on no-recourse home mortgages), they are smartly paying down high-interest loans. The American Banking Association reported yesterday that delinquencies declined in the third quarter for most types of consumer loans, including auto loans and bank cards. The exception: housing-related loans. Home-equity-loan delinquencies rose to a record 4.30% of all accounts, and mobile-home delinquencies were up as well, to 3.63%. This may be a sign that homeowners feel entitled to forbearance on housing-related debt. They also sense that banks are in no hurry to foreclose on residential properties in a saturated market.

Today the Federal Reserve reported that total seasonally adjusted consumer debt (all debt not secured by real estate) fell $17.5 billion in November to $2.46 trillion. Annualized, that is a drop of 8.5%, almost twice the cumulative rate of decline since consumer credit peaked at $2.58 trillion in Q3 2008.

Another thing that consumers are walking away from is their health insurance. Today brings the news that Anthem Blue Cross and Blue Shield, the largest health insurer in Maine, is seeking a rate increase of 23% for its 11,000-plus individual policy holders. If approved, the bump would cap a decade of truly mind-boggling increases in health premiums. Despite the increases, Anthem is losing money on individual policies as healthy subscribers migrate elsewhere (my wife and I dropped our HealthChoice years ago). Those left are experiencing the classic "death spiral."

I have my own plan for healthcare reform, and it doesn't take up 2,000 pages like all those congressional plans do. It takes up just one. The keystone is saying good-bye to private health insurers, not subsidizing them they way congressional Democrats propose to do. Incidentally, the reform proposals now in the pipeline are impeding economic recovery, as Kristin Graham ably explains.

So what's driving all those bankruptcies and delinquencies? Other than the high costs of healthcare, that is. Why, it's the weak labor market, of course. Four million jobs in the U.S. were lost in 2008, another four million in 2009. We needed to add 2.5 million jobs during those two years just to keep the unemployment rate from rising. This morning there was the widely anticipated report from the Bureau of Labor Statistics on the employment situation during the month of December. Prior to the news release, there had been hope that, for the first time since December 2007, the U.S. economy might have added jobs (the "whisper" number was +100K).

Alas, another 85,000 jobs were lost--or more, depending on what number you use. The Establishment Survey figure of -85K was the least damaging. The Household Survey yielded a whopping -589K. The number to which I pay the most attention--the adjusted household survey--came in at -465K. Folks, those numbers are just plain awful. As I write, stock traders seem to be reaching for their Tums. No surprise; they were warned.

Jake at EconomPic has graciously updated his chart showing hours worked per week per capita. Sobering.

Big deal. Who needs to work for a living these days? The government has you covered. Personal Current Transfer Receipts, as defined by the Bureau of Economic Analysis, are "benefits received by persons for which no current services are performed" (e.g. retirement and disability insurance benefits, worker's compensation, medical benefits, unemployment insurance and other income assistance, etc.). Transfer payments now add up to one-fifth of GDP. That's groovy. But, as former British Prime Minister Margaret Thatcher pointed out, "the trouble with socialism is that you eventually run out of other people's money."

Up, up, and away...

Monday Muse

Joni Mitchell

Urge For Going